Philip Maddocks: Wall Street says it can’t do it alone, urges Main Street to offer unsustainable pay packages to its executives

Friday

Oct 30, 2009 at 12:01 AMOct 30, 2009 at 10:54 AM

Calling it the only effective means of getting the U.S. economy back on track, Wall Street executives yesterday urged ordinary businesses of every stripe to begin vastly overpaying the executives they still have.

Philip Maddocks

Calling it the only effective means of getting the U.S. economy back on track, Wall Street executives yesterday urged ordinary businesses of every stripe to begin vastly overpaying the executives they still have.

"This no time for American enterprise to worry about balancing account ledgers and following sound business practices," said one executive with Goldman Sachs. "We must give our executive corps – not just in New York but across this great nation – the financial tools they need."

He praised his colleagues on Wall Street for forthrightly ignoring the notion that a company needs to make money in order to heap lavish pay packages on its star executives and suggested other American businesses could learn from their example.

"Too much of this country’s business seems to be mired in the old thinking about risk and reward," he said. "When it comes to handing out excessive pay packages to those who haven’t earned it, we have nothing to fear except fear itself."

Another banking executive, calling for a halt to "parsimonious pay practices that threaten our recovery," said he was worried by a "misalignment" at present where the only businesses too big to fail were tied to the trading sector.

"We need to broaden that," he said. "We need more business – businesses that actually do things for ordinary Americans like coffee shops, furniture stores, hair salons, and reality television programs – to make themselves too big to fail as well. If they did, our economy would be a lot more able to withstand the next financial shock."

The effectiveness of such new pay policies on Main Street — and whether they will encourage irresponsible business decisions designed to inflate bonuses — will ultimately be dictated by how eager these businesses are to start playing by Wall Street’s rules. Even in New York and Washington, there was skepticism about whether other, more traditionally profitable businesses would be able to keep up with the pay practices that have allowed top investment executives to reap huge financial rewards while their banking companies turned in poor or unsustainable performances.

"I have my doubts," said Treasury Secretary Timothy Geithner, while taking time between phone calls to Goldman Sachs. "But the only way I see us getting out of the financial mess we are in is by following the lead of those who got us into it in the first place."

While unlikely by itself to begin a widespread practice of lavish compensation, the Wall Street executives’ plan is one of the most far-reaching responses yet to the current financial crisis.

"I wouldn’t begin to say how much money you should make on Main Street," said an executive at JPMorgan Chase. "But I do think it is appropriate to set a limit of how little money you should make. Anybody who is not making $100 million a year is putting our financial system at excessive risk."

Instead of pay limits, the new Wall Street rules are intended to discourage pay packages that don’t encourage risky practices and multimillion dollar compensation. The Wall Street bankers want businesses to negotiate agreements that reward executives for any type of performance.

"If you try to attach too many strings to these agreements, it could lead to the departure of the very executives needed to accept these lavish pay packages," warned one former worker at AIG.

Wall Street executives acknowledged that it could be months before they would be able to tell whether their changes would have the intended effect. Businesses will have to be trained to stop trying to tie compensation to risk management. And several Wall Street executives suggested it might be helpful to seek the advice of compensation consultants who are adept at finding ways around traditional pay restrictions.

Wall Street executives emphasized that their plan was not intended to make pay packages more socially equitable but was part of a broader effort by them to shore up the stability of their own financial system.

"We like what the banking system has been able to do," said one. "You look at Bank America or Citigroup and even though they have been losing money that hasn’t stopped them from paying their top people tens of millions of dollars. That’s the kind of can-pay attitude we are hoping to see out of businesses on Main Street. If Citi can pay Vikram Pandit $38.2 million in salary, bonuses, stock, options, and perks, there is no reason why a city can’t pay its public works director tens of millions of dollars."

Executives on Wall Street said that in addition to enormous pay packages for executives across the board, they would like to see companies beyond Wall Street do a better job of imposing special perks on these workers — benefits like country club memberships, private planes, limousines or company-issued cars.

Said one, "The sooner all of our executives start living beyond our means again, the sooner we’ll all get back to where we were."